With the war in Ukraine, sky high gas prices, record high home prices, supply-chain problems, and a falling stock market—is it time to worry? Taken individually these are each major issues but are they going to cause a recession? We don’t think so. Here’s why.
Russian invasion of Ukraine
The unprovoked invasion of this democratic country is a painful tragedy to watch. It is horrific and yet the effects of recent wars on investments have tended to be transitory. Going back to the US invasions of Afghanistan and Iraq, the US stock market initially declined but recovered longer term, with stocks recording positive results for years—and those wars involved US troops on the ground. That said, military conflicts are highly uncertain with unintended escalations always possible. In the end, we expect that the war in Ukraine will go on for years in some form, but we do think that there will be some kind of uncomfortable arrangement that will allow the situation to stabilize. We shall see.
Sky high gas prices
Since the second quarter of 2020 oil prices have been heading higher. So far this year, oil has topped $120 a barrel, one of the highest levels in many years. The conflict between Russia and Ukraine helped to push oil to record highs as traders worried about an interruption or curtailment in supply from Russia. With the European Union, US and other democracies looking to boycott Russian oil, the normal flow of oil may be disrupted. As we experienced over the last two years of COVID, we have learned how intertwined and dependent we all are on the smooth, uninterrupted flow of goods from around the world. That said, oil is a commodity that cannot be replaced overnight. New supply can take years to come online and demand has steadily increased.
We believe that this oil shock is a reminder to many corporations and governments of how fragile the world oil market is and how dependent our economies still are on petroleum products. However, we think that these events will spur some nations to accelerate their plans to shift away from fossil fuels while at the same time other countries will encourage more oil exploration and development. Both of these efforts have the potential to reduce the impact of oil supply disruptions and possibly lower the price of oil over the long term.
Record high inflation
The record breaking inflation we are now experiencing is primarily related to the reopening of economies since the COVID shutdowns in 2020. The recovery has come swiftly as evidenced by the rapid recovery of the stock market later in 2020 and 2021. In addition, COVID caused a surge in demand for consumer products and housing at a time of constricted supply. The result has been rising prices across a wide range of products and services. Even so, we expect these
forces to subside over time. It may take a few years but eventually demand should taper and the supply-chain backlogs should catch up. Then, the long term big picture forces will resume: the continued departure of workers from the workforce with fewer new workers entering because of declining birth rates in the US and many developed countries.
This last point is a powerful long-term trend that is affecting the majority of the global population. Because of that constant headwind, we are expecting growth to slow and inflation to fall in the next 3-5 years. It won’t be a bad time; it will be more of a return to the slow growth economy we’ve been living with over the last ten or twenty years.
Hang in there
Of course, each of these factors will have some long-term effects on the economy and the way we live. All I am saying is that I don’t believe it is cause for alarm. The US economy remains healthy and the US dollar remains an important reserve currency where investors prefer to park their money when there is great uncertainty.
In the meantime, we will continue to monitor the situation carefully.
Do you still have questions about the economy and markets? Give us a call. We’re here to help.
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Lyman H. Jackson Lyman@PlanWithFPS.com
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